Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use IPO Lockup Lending for Early Liquidity
Transcript
- Lucas: So Luna, you've been watching Coinbase's wild week — up over sixteen percent in five days, which is a lot for a company that size. But here's what I keep thinking about: the founders and early employees who are still in lockup from that listing. They're watching the stock rip and they can't sell a single share. Luna: That's the classic frustration, right? You're paper-rich but locked out. But I've been reading about this workaround where founders can actually lend out their locked-up shares to financial institutions and get cash now. Is that legit? Lucas: Completely legit, and it's becoming a bigger piece of the founder liquidity toolkit. It's called securities lending against lockup shares. Basically, a founder who owns locked-up stock can lend those shares to a bank or a prime broker, and in return they get a fee — plus, in many cases, collateral in the form of cash. That cash can be used for anything: diversifying into other assets, paying down personal debt, funding a new venture. Luna: So it's like a margin loan but using shares you can't even sell yet. Who's actually doing this today? Lucas: There's a whole ecosystem of specialty lenders now — firms like Yieldstreet and also major banks like JPMorgan and Goldman Sachs. They've built dedicated teams to underwrite these loans, often for founders in companies that have already had a strong IPO or direct listing. The key is that the lending is secured by the shares, and the lender is making a bet that the stock stays above a certain level. Luna: So the lender is taking on the risk that the stock drops below a threshold. That makes sense. But what's the cost for the founder? Lucas: It's not cheap. You're looking at interest rates in the high single digits, sometimes low double digits, plus the lender will typically lend you only fifty to seventy percent of the current market value of the shares. And there are covenants — if the stock falls, the lender can issue a margin call, and you have to put up more collateral or pay down the loan. That can get messy fast. Luna: Like what happened to some founders in 2022 when tech stocks cratered. I remember that story about a founder who had to sell other assets to cover a margin call. Lucas: Exactly. And that's the risk. But the upside is you get liquidity without waiting for the lockup to expire. For a founder who wants to diversify before a big tax event, it can be a smart move. You're essentially hedging your concentration risk. Luna: So how does this actually work in practice? Walk me through a concrete example. Lucas: Let's say a founder has ten million dollars worth of locked-up shares in a company that just IPO'd. They approach a lender, who values the shares at, say, five million dollars in loan proceeds — a fifty percent loan to value. The founder pays an interest rate of around eight percent per year. In exchange, the lender gets the right to those shares if the founder defaults. The founder can use that five million to buy a diversified portfolio, maybe a stake in a private equity fund, or just hold cash. Luna: And the lender can also earn a fee by lending those shares to short sellers, right? That's the classic securities lending model. Lucas: Right. The lender can re-lend the shares to short sellers, who are betting the stock will drop. So the lender is earning both the interest from the founder and the lending fee from the short seller. That's why they can offer a loan at a slightly better rate than a typical margin loan — there's more upside for them. Luna: But isn't there something circular about that? You're lending shares to someone who's betting against the company you're still locked into? Lucas: It's a fair point, and some founders might not love the optics. But it's a purely financial transaction. And it's worth noting that the founder doesn't own the shares anymore in a legal sense while they're lent out — they've transferred them to the lender as collateral. So they've effectively sold the shares to the lender, and they have a contractual right to get them back when the loan is repaid. Luna: So it's really a sale and repurchase agreement in disguise. That's clever, but also very easy to mess up. I imagine the legal paperwork is intense. Lucas: It is. You need a team that understands securities lending, tax implications, and the specific terms of your lockup agreement. Not every company allows this, by the way. Some lockups prohibit any transfer or lending of shares. So the first step is checking the actual agreement. Luna: What about the tax side? Is this a taxable event when you enter into the loan? Lucas: That's a great question. Generally, no — it's not a taxable sale of the stock, because you're borrowing against the shares, not selling them. But the interest payments you receive from the lender are taxable income. And if you default and the lender sells the shares, then you have a taxable gain or loss on the difference between your basis and the sale price. So there are definite tax implications, and founders need to plan carefully. Luna: So who's a good candidate for this? Is it only for mega-unicorn founders, or can a smaller exit work too? Lucas: It's typically for larger exits, just because the transaction costs are high — legal fees, due diligence, the lender's underwriting. You're probably talking about at least ten to twenty million dollars in share value to make it worthwhile. But we've seen it used in exits as small as fifty million. And there are now platforms that pool founders together to get better terms. Luna: Interesting. And with the recent IPO boom — I'm thinking of all the AI and crypto names — this is becoming more relevant. I saw that Palantir founders did something similar before their direct listing. Lucas: They did. Palantir's founders used a pre ipo secondary sale to monetize some stock before the direct listing, which is a cousin of this strategy. But the lending against locked-up shares specifically is more common in post ipo situations. And it's growing. I've seen estimates that the market for lockup lending is now in the billions of dollars annually. Luna: That's a lot of founders getting early liquidity. It feels like a shift in the culture — not just waiting for the lockup to expire, but actively managing your wealth. Lucas: Absolutely. Founders are becoming more sophisticated about their personal balance sheets. They don't want to ride a single stock all the way down. And with the volatility we've seen in tech stocks — even a solid company like NVIDIA can swing five percent in a week — it's a risk management tool. Luna: And you see that in the data, too. I mean, NVIDIA's down two and a half percent over the past five days, while something like Coinbase is up big. That kind of dispersion is exactly why a founder wants to hedge. Lucas: Right. And that's where the lending strategy shines. You get cash out, you diversify, and you still participate in the upside if the stock keeps climbing — because you still own the shares, you just owe the lender the cash plus interest. So if the stock doubles, you've gained on the shares you still effectively own. Luna: But you've also paid interest on the loan, so your net gain is less than if you had just held. It's a cost to hedge. Lucas: Exactly. It's insurance, and insurance isn't free. But for a founder with a huge concentration in one stock, it can be worth it. The key is to structure the loan so the interest rate and loan to value are in your favor, and to have a clear plan for repayment. Luna: So if I'm a founder considering this, what's the first step? Talk to your CFO? Or a lawyer? Lucas: Both. And you need to talk to your tax advisor, too. But I'd start with the lockup agreement itself. If it explicitly forbids lending, then this whole conversation is moot. If it's silent or allows it, then you can start shopping around. And you should get multiple quotes — terms vary widely, and some lenders are more aggressive than others. Luna: And you should have a exit strategy for the loan itself. I assume you don't want to roll this over for years. Lucas: No, you want to pay it off right after the lockup expires, typically within six months. You sell a portion of your shares — enough to cover the loan and interest — and live happily ever after. The risk is if the stock is below the loan value at that point, you might be forced to sell more shares or come up with cash from elsewhere. That's the margin call scenario again. Luna: So it's a tool, but not one to use lightly. You've got to have a plan B. Lucas: Always. And that's what separates a smart founder from a lucky one. It's about understanding the trade-offs and making a deliberate choice. So if you're a founder sitting on locked-up shares and thinking about the next big move, this is worth exploring. Luna: Before we wrap, I want to mention something to our listeners. We're able to do deep dives like this every single day because of a small group of you who chip in a few bucks a month at buy me a coffee dot com slash fexingo. It's honestly what keeps this ad-free and independent. If you find these episodes useful, that's the way to keep them coming. Lucas: Yeah, we don't have ads, and we like it that way. So if you can spare a couple of dollars, it really does help. And we get back to the exit talk in a second. Luna: Right. So, Lucas, stepping back — do you think this lockup lending trend is here to stay, or is it just a product of this bull market? Lucas: I think it's here to stay. The demand for early liquidity is structural. Founders have more leverage, more awareness of wealth management, and the tech cycle is longer. Even if the market cools, there will always be founders who want to diversify and who value the optionality. The lenders will adjust their rates and terms, but the product itself is here to stay. Luna: That makes sense. And for founders listening, the lesson is clear: don't leave your liquidity to chance. Plan ahead, understand your lockup, and know your options. Lucas: And if you're not sure, talk to people who've been through it. The startup exit world is full of war stories, and this is a tool that can smooth the ride. So, that's our take on lockup lending. It's a niche, but it's a powerful one.